U.S. banks suffer 149 percent rise in bad loans

New data on each of 8,000 banks show the breadth of recession’s impact

[WHEN WILL THEY LEARN – A BAD CREDIT RISK IS A BAD RISK FOR A REASON]

While a large majority of banks were still healthy, 163 ended the year with more troubled loans than capital, up from only 13 a year earlier, according to the analysis of data from the Federal Deposit Insurance Corp. by msnbc.com and the Investigative Reporting Workshop at American University in Washington, D.C.

Foreclosures and bad loans raced through the banking industry in 2008, with the more than 8,000 U.S. banks registering a 149 percent increase in troubled assets, according to a new analysis of bank financial reports to the federal government.

Nationwide, seven out of every 10 banks were less well prepared to withstand their potential loan losses than a year earlier. The analysis relies on information reported quarterly to the FDIC, calculating each bank’s troubled asset ratio, which compares troubled loans against the bank’s capital and loan loss reserves.

Although attention has focused on the largest banks, which hold the lion’s share of deposits, the analysis shows how widespread the problems in the banking industry became in 2008 as the mortgage meltdown and broader recession unfolded. Msnbc.com is publishing information on the nation’s 400 largest banks as well as all banks with high ratios of troubled loans at year’s end. And the American University group has created a new Web site, BankTracker, to provide information on the financial health of every bank in the country.

The American Bankers Association opposes the publishing of such figures for mainstream consumption. It said that no single figure can capture the complexity of the rapidly changing financial situation at an individual bank, and that the public may not be prepared to handle that information.

“Frankly, you could cause a run on a bank unnecessarily,” said John Hall, ABA spokesman. “By widely publicizing this ratio, while the analyst community often uses it, when it’s put in the general public’s hands often they get confused and don’t understand that this doesn’t necessarily mean the bank can’t come back.

‘People may not understand the context’The ABA’s chief economist, James Chessen, agreed, saying, “In this environment where confidence has been shaken, it’s easy to play into those kinds of fears, where people may not understand the context.”

But a representative of the Independent Community Bankers of America, which represents 5,000 mostly smaller banks, said he didn’t oppose the publishing of such figures.

“As far as caring about the health of your institution, or the institution you do business with, I think it’s prudent for any consumer to have a basic understanding of how the bank is doing. Banks are required to report their statement of condition on a quarterly basis. People just have to understand that it’s only a snapshot in time, and literally the day after that snapshot was taken, conditions could change positively or negatively.”

This troubled asset ratio isn’t a predictor of the future. It doesn’t show “who’s next to fail.” Bankers and regulators point out that some unhealthy banks have quietly gotten healthier, through state or federal supervision, better management, injections of additional capital, or because borrowers who were behind have been able to get current on their payments. Although the FDIC keeps a “troubled bank list,” it does not make that list public, for fear of starting a panic among customers.

The numbers don’t reveal certain exotic troubled assets that have contributed to the problems at the larger banks, such as mortgage-backed securities and collateralized debt obligations, meaning the ratios may underestimate the size of the problem at certain banks.

But like a high cholesterol level, it and similar ratios have been commonly used by regulators and analysts as one indicator of banks in need of closer scrutiny. It offers insight into a major problem that more banks are facing: the general risk of the deepening recession, combined with risky lending by certain banks.

‘Horrendous decisions’[Many mandated by Congress or under threat of lawsuit]
Fine, of the community bankers association, said he expects about 120 banks to fail this year. Over two years, that would make about 150.

The community bankers have tended to portray the banking problems as isolated among the big banks, with their creation and use of mortgage-backed securities and other non-traditional instruments.[A very accurate protrayal – ask your local community banker – while your at it ask him how he fees about the Government charging his “safe” bank higher FDIC fees – which she/he must pass on to his customers to pay for the mistakes made in Congress and on Wall Street] The small banks have an advertising campaign, comparing Wall Street’s recklessness with Main Street’s quiet conservatism. As Fine says, “We’re getting hit by the shrapnel of the explosions on Wall Street. That’s wounding some of the banks and killing some of the others.”

“You’ve got good bankers and you’ve got bankers doing not so good. Was there a percentage of banks that got caught up in the go-go hysteria? I’m sure there was. You had bankers who made horrendous decisions in community banks, and we’ve seen what the management of the larger banks did, which is a train wreck. But the vast majority of the 8,000, well into the 90th percentile, are doing well, or are victims of the general economic funk we’re in, or happen to be in an area where the economy went to hell in a hand basket.

“When I look at the banks closed by the FDIC, about half of those that have failed would have failed in a very mild recession, because they just weren’t very well run banks,” Fine said. “They were barely hanging on anyway.”

What’s the trend?

DOING THE MATH

How the ratio is calculated

The troubled asset ratio compares the bank’s troubled assets against its ability to withstand losses.

Here’s how it’s calculated:

Banks are required to report detailed financial results to the FDIC at the end of each quarter. The FDIC is required to make that information available to the public.

First we calculated the total troubled assets at a bank. That adds together three elements: loans that are 90 days or more past due; loans that are in “non-accrual status,” meaning the bank is no longer adding interest from the loan to its income; and real estate that the bank already owns, usually from foreclosure. Excluded are loans which are wholly or partly guaranteed by the U.S. government, such as FHA and VA loans, because the banks bear little or no risk.

That total is divided by the bank’s ability to withstand losses. That’s a sum of two elements: what’s called Tier 1 capital (which is mostly money invested in the bank by shareholders) and loan loss reserves, or money set aside to cover losses.

The result is reported as a percentage. So a bank with $100 million in capital and reserves, and troubled assets of $10 million, would have a troubled asset ratio of 10 percent.

There was a significant deterioration in 2008 in the ability of banks to withstand potential losses from troubled loans.

If a ratio of 100 is a sign of severe stress, then an additional 150 banks moved past that level in 2008, for a total of 163. That’s 2 percent of the nation’s banks.

Some analysts have said that any ratio over 20 percent is an early warning sign. An additional 1,349 banks moved past that level, for a total of 2,308. That’s 28 percent of the nation’s banks.

Most banks still have relatively low levels of troubled loans. But there was a doubling of the median troubled asset ratio for all banks in the U.S., to 9.87 from 4.94 a year earlier.

For banks with two years of data, the total of troubled assets rose to $235.29 billion at the end of 2008. A year earlier, for the same banks, it was $94.62 billion. That’s an increase of 149 percent.

Out of 8,198 banks for which we have two years of data, 5,784 — or 71 percent — had a higher troubled asset ratio at the end of 2008 than a year earlier.

Only 1,974 banks, or 24 percent, showed improvement over the period. And 440 banks, or 5 percent, stayed the same.

The picture was worse for the largest 100 banks: 90 showed declining strength. Only seven improved, and one maintained the same ratio. (Two did not report data that could be compared: IndyMac Bank failed in July 2008 and was opened by the FDIC under a new name, IndyMac Federal Bank. Bank of China, in New York, did not report capital and reserves.)

The largest bank with a ratio over 100 is AmTrust Bank of Cleveland, which had a ratio of 130 at year end, or 30 percent more troubled loans than capital and reserves. AmTrust missed a year-end deadline set by its regulator to raise more capital. A spokeswoman, Donna Winfield said Monday in an e-mail, “We have, as previously reported, developed a comprehensive risk-reduction strategic plan that is designed to assure our long-term viability. We have every confidence that we can implement this plan successfully. In addition we are looking at opportunities to raise capital through actions such as our recent agreement to sell our Columbus branches.”

Who calculated the ratio?Wendell Cochran, senior editor of the Investigative Reporting Workshop, devised the ratio. A former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, Cochran may have been the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA Today and elsewhere that calculated this ratio for every bank and savings and loan in the nation. Cochran now teaches journalism at American University.

Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating a Texas Ratio, but they are all attempts to measure a bank’s ability to cover potential losses.